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Risk and Resilience: Embedding resilience to environmental risk in routine financing decisions

Why risk and resilience matters


Financial institutions and their regulators are all recognising that environmental and social issues are now increasingly material drivers of mainstream credit, market and operational risks. This is a major shift from their historical treatment as reputational risks. 

The Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD) has been a major driver of this trend. The TCFD recommends that firms use forward-looking scenario analysis to assess climate risks. This is a necessary reflection of the fact that both the physical risks of extreme weather events and the transition risks derived from the shift to a net zero carbon economy will not mimic historical trends. 

However, using scenario analysis to integrate environmental risks into routine financing decisions presents most financial institutions and regulators with new challenges. If these can be overcome, the terms on which capital is provided will take better account of the true environmental risks different business activities face. One powerful application is to change how financial institutions assess the resilience of investments in infrastructure to climate risks. 

 

What is CISL is doing about it?


Cambridge’s strengths across both the natural and social sciences give rise to opportunities for truly multi-disciplinary centres of excellence, such as the Cambridge Centre for Risk Studies and the Centre for Environment, Energy and Natural Resource Governance.  

Against this backdrop, CISL works with insurers, banks and investors to develop practitioner-owned methodologies that help industry address how to integrate environmental scenario analysis into their decisions and direct capital towards sustainable infrastructure. We advise central banks and financial regulators on appropriate actions they can take and we develop research insights that deepen our collective understanding of the links between environmental and social trends and financial risk.

 

Our work and thought leadership


Finance’s shifting focus from risks to solutions

26 February 2019 – Kajetan Czyz, Programme Director, Sustainable Finance, reflects on four decades of progress in the field of sustainable finance, which is entering a new phase of maturity. He describes CISL’s recent work in developing practical solutions for investors, banks and insurance companies to proactively encourage, create and exploit the opportunities inherent in the shift towards a sustainable economy.

Finance’s shifting focus from risks to solutions - Read More…

Investors and lenders need better tools to manage climate risk to homes, mortgages and assets, finds new research

22 February 2019 – New open-source models from ClimateWise, a global insurance network, offer step-by-step guides to help the financial industry prepare for risks posed by climate change.

Investors and lenders need better tools to manage climate risk to homes, mortgages and assets, finds new research - Read More…

Physical risk framework: Understanding the impact of climate change on real estate lending and investment portfolios

22 February 2019 – The ClimateWise Physical Risk Framework demonstrates how the expertise and tools of the insurance industry can support other parts of the financial system to understand their physical risk exposure.

Physical risk framework: Understanding the impact of climate change on real estate lending and investment portfolios - Read More…

Transition risk framework: Managing the impacts of the low carbon transition on infrastructure investments

22 February 2019 – The ClimateWise Transition Risk Framework provides an open-source, step-by-step methodology on how to manage the risks and capture emerging opportunities from the low carbon transition.

Transition risk framework: Managing the impacts of the low carbon transition on infrastructure investments - Read More…

Gearing up for regulation: The ClimateWise Principles Independent Review 2018

December 2018 – The ClimateWise Principles Independent Review 2018 finds the largest year-on-year improvement in group mean score against the Principles since 2014, and confirms the full alignment of the updated ClimateWise Principles with TCFD recommendations.

Gearing up for regulation: The ClimateWise Principles Independent Review 2018 - Read More…

Embedding environmental scenario analysis into routine financial decision-making in Mexico and South Africa

November 2018 – Following on from its work as a knowledge partner to the G20’s Green Finance Study Group, CISL's Centre for Sustainable Finance has published reports on embedding environmental scenario analysis into financial decision-making in Mexico and South Africa.

Embedding environmental scenario analysis into routine financial decision-making in Mexico and South Africa - Read More…

Trustees should prioritise climate risk

15 October 2018 – The facts speak for themselves and must be acted on – trustees need to prioritise climate risk says Andrew Voysey, CISL’s Director for Sustainable Finance.

Trustees should prioritise climate risk - Read More…

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Rewiring the Economy

This work relates directly to Rewiring the Economy, CISL's ten-year plan to lay the foundations for a sustainable economy.

Task 4: Ensure capital acts for the long term

Task 5: Price capital according to the true costs of business activities

Image

Severe flooding in a residential area of Baton Rouge, LA; credit: U.S. Department of AgricultureCreative Commons Attribution-2.0 Generic